In the fall of 2008, a financial crisis of a scale and severity not seen in generations leftmillions of Americans unemployed and resulted in trillions in lost wealth. Our broken financial regulatory system was a principal cause of that crisis. It was fragmented, antiquated, and allowed large parts of the financial system to operate with little or no oversight. And it allowed some irresponsible lenders to use hidden fees and fine print to take advantage of consumers.
To make sure that a crisis like this never happens again, In 2010 President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The most far reaching Wall Street reform in history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis. The law also provides common-sense protections for American families, creating new consumer watchdog to prevent mortgage companies and pay-day lenders from exploiting consumers. These new rules will build a safer, more stable financial system—one that provides a robust foundation for lasting economic growth and job creation.
Holding Wall Street Accountable
The financial crisis was the result of a fundamental failure from Wall Street to Washington. Some on Wall Street took irresponsible risks that they didn’t fully understand and Washington did not have the authority to properly monitor or constrain risk-taking at the largest firms. When the crisis hit, they did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk. Financial reform includes a number of provisions that will curb excessive risk taking and hold Wall Street accountable.
Taxpayers will not have to bear the costs of Wall Street’s irresponsibility: If a firm fails in the future it will be Wall Street – not the taxpayers – that pays the price.
Separates “proprietary trading” from the business of banking: The “Volcker Rule” will ensure that banks are no longer allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. Responsible trading is a good thing for the markets and the economy, but firms should not be allowed to run hedge funds and private equity funds while running a bank.
Ending bailouts: Reform will constrain the growth of the largest financial firms, restrict the riskiest financial activities, and create a mechanism for the government to shut down failing financial companies without precipitating a financial panic that leaves taxpayers and small businesses on the hook.
Protecting American Families from Unfair, Abusive Financial Practices
Before the crash that devastated our economy, there were seven different regulators with authority over the consumer financial services marketplace. Accountability was lacking because responsibility was diffuse and fragmented. In addition, many mortgage lenders and mortgage brokers were almost completely unregulated. Too many responsible American families have paid the price for an outdated regulatory system that failed to adequately oversee payday lenders, credit card companies, mortgage lenders, and others, allowing them to take advantage of consumers. That’s why President Obama overcame the big bank lobbyists to protect and empower families with the strongest consumer safeguards ever.
President Obama’s Wall Street reform law created an independent agency to set and enforce clear, consistent rules for the financial marketplace. The Consumer Financial Protection Bureau (CFPB) is setting clear rules of the road and will ensure that financial firms are held to high standards. Like a neighborhood cop on the beat, the CFPB supervises banks, credit unions, and other financial companies, and will enforce federal consumer financial laws. For example:
For families who want to buy a home: The piles of forms needed for a regular mortgage can be overwhelming, and many brokers have taken advantage of that confusion to give borrowers loans they didn’t need or couldn’t afford. The CFPB has launched a program called Know Before You Owe, an effort to combine two federally required mortgage disclosures into a single, simpler form that makes the costs and risks of the loan clear and allows consumers to comparison shop. For the first time, there is ongoing federal oversight of both nonbank companies and banks in the mortgage market to protect borrowers from unfair, deceptive or other illegal mortgage lending practices.
For families caught by unexpected overdraft fees: Many households have been automatically enrolled in expensive overdraft programs. These programs can hit consumers with costly overdraft fees for even the smallest purchases. For example, the FDIC found that the average overdraft charge for a single purchased item—like a $2 cup of coffee—is $30 at banks with assets more than $1 billion. The CFPB will enforce new rules that give consumers a real choice as to whether to join expensive overdraft programs so that they are not unknowingly charged unnecessary fees.
For families with credit cards: The Credit CARD Act is often called the Credit Cardholders Bill of Rights. President Obama signed the bill into law in May, 2009. Many of the most significant provisions of the law took effect in February, 2010 and are being enforced by the CFPB. The law has two main purposes:
- Fairness: Prohibit certain practices that are unfair or abusive such as hiking up the rate on an existing balance or allowing a consumer to go over limit and then imposing an over limit fee.
- Transparency: Make the rates and fees on credit cards more transparent so consumers can understand how much they are paying for their credit card and can compare different cards. The CARD Act gives families who have used credit cards to get by when times are tight clarity on the interest rates they are charged.
For families considering student loans: President Obama has asked his Administration to make sure students and families have the tools and relevant information that will help them make sound financial decisions in pursuing their higher education goals. The Department of Education and the Consumer Financial Protection Bureau have launched a model financial aid disclosure form — the Financial Aid Shopping Sheet — to help students better understand the type and amount of aid they qualify for and easily compare aid packages offered by different colleges and universities, and are designing a College Scorecard containing key indicators of student success and financial outcomes about every institution of higher education nationwide. This new report card will make it easier for students and families to choose a college that is best suited to their goals, finances, and needs.
Has the Dodd-Frank regulatory reform bill protected consumers?
What is the Volcker Rule?
Named after former Federal Reserve Chairman Paul Volcker, the eponymous regulation aims to bring commercial banking back into the good old (and pretty boring) days, when all they did was to make loans and take deposits. It intends to prevent banks from making risky (or “speculative”) investments with customers’ deposits – basically, to separate commercial and investment banking. Specifically, it would prohibit commercial banks that are FDIC-backed from:
1. Owning, partnering with or investing in hedge or private equity funds. Bank of America cannot make their speculative trades through a partner fund.
2. Engaging in proprietary trading: speculation using the firm’s own funds with the intention of making a profit rather than mitigating risk. Wells Fargo cannot take on large amounts of auto industry debt, just because it thinks it will be profitable.
However, the act explicitly permits certain activities:
1. Trading in U.S. government obligations. Banks can buy government-backed securities, such as bonds issued by Fannie Mae, Freddie Mac, Ginnie Mae or the U.S. Treasury.
2. Market-making, or placing transactions on behalf of customers. Banks can match up a customer who wants to sell a security and a customer who wants to buy it.
3. Hedging to reduce the risk. If Chase has a large amount of mortgage loans, they face severe losses if interest rates go down. To guard against that possibility, they buy U.S. Treasury securities, which appreciate in value if interest rates fall.